What is the basic structure of a 401(k) plan?

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Enrolling is a 401(k) plan

Employees can usually enroll in the employer sponsored 401(k) plan after working at the company for a specified period of time. And, employees are also allowed to opt out of the plan if they do not wish to contribute to it. The Department of Labor provides a lot of good information on 401(k) plan structures for employers.

401K Contributions

The contributions made by the employee, as well as the employer contributions are tax deferred. In addition to this tax deferred growth of the funds, 401(k) plans also help to reduce an employee’s taxable income with pre-tax contributions. Employee contributions are immediately 100% vested in the plan. However, contributions made by the employer are usually vested in percentage amounts over a minimum time frame that is set by the employer.
Employees may begin withdrawing funds from their 401(k) plans at or after age 59 ½. If they access the funds before that time – with a few exceptions – they will incur a 10% early withdrawal penalty from the IRS.

401(k) Investment Options

There are usually a variety of investment options for employees to choose from, including company stock, mutual funds, and money market accounts. Employees can decide how much they wish to contribute to the plan, within certain maximum limits. And, the employer generally will also make a “matching” contribution, also based on maximum limits as defined by law. The maximum amount that an employee can contribute to a 401(k) plan in 2010 is $16,500. However, if you are age 50 or over, you are also eligible to contribute an additional $5,500 known as a “catch-up” contribution. These maximum contribution amounts usually increase every year, indexed for inflation.

How to invest your 401K Assets?

Probably one of the most tricky aspects to having a 401(k) plan is the fact you are in charge of the investment strategy. Sure your employer will give you a selection of funds and indexes within your plan, but often the selection of funds is limited, or you really have no idea what funds to select for your retirement investing plan. Many 401(k) investors have gotten crushed in the last several bear markets and are now fearful to invest in equities, or have limited exposure to them at all.

Learn to Time Your 401(k) Investment Allocations

Spending a few minutes per month can make a world of difference to your 401(k) statement balances over the longer-term. If you undertook a simple strategy of shifting your 401(k) assets into the top performing funds available within your plan every month or two, it is possible that your own 401(k) plan can outperform most mutual funds and professional money managers over the long-term. Even better, if you could see another market crash beginning to form you could move your 401(k) funds into cash or money market holdings to avoid most of the market downturn. Learn more about how regular 401(k) investors like you are indentifying the best 401k investments with these 7 simple 401k plan advice strategies.

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